Fed Increases Discount Rate

By Colleen SullivanBy Colleen SullivanOctober 26, 1977

The stock market slipped through yet another psychological barrier yesterday as the Dow Jones industrial average fell below the 800 point level in morning and early afternoon trading, although it recovered in a late rally to close at 801.54, off 0.78.

The third consecutive losing session for Wall Street prices saw the Dow off as much as 9.54 points. The average of 30 industrial issues last closed below 800 on Oct. 2, 1975, when it hit 794.55.

The New York Stock Exchange composite index sank below the 50 level for the first time since Jan. 7, 1976, with a 0.38 drop to 49.86.

Losers swamped gainers by a 4 to 1 margin in the broad tally on the NYSE.

Big Board volume reached 23.59 million shares, up from 19.21 million Monday.

Analysts said the market continues to suffer from concern over rising interest rates, weakness in the dollar and the Federal Reserve Board's credit tightening policies.

The recent increases in bank prime lending rates to 7.75 per cent as well as rises in other short term interest rates have pressured Wall Street prices by making it more attractive for large investors to put their funds in bonds and money market instruments rather than in stocks.

Uncertainty over the outlook for President Carter's energy package, tax revision proposals and a tax cut have also worried the financial community.

The expectation that the Fed would increase the discount rate, which it did after the market's close, also triggered selling, some analysts said.

Wall Street analysts described the market climate as "hopelessly confusing," and one of "continuing uncertainty." "What we're getting now is a feeling of hopelessness," said Robert Stovall at Reynolds Securities. "The market keeps dropping steadily and nothing seems to stop it."

"Nobody knows what's going to happen," said Robert Donner, an institutional broker with Blyth Eastman Dillon in New York. "In this type of situation, it's the uncertainty that is feeding upon itself that is sending the market down. The general tenor is that there's just too much confusion about the outlook for 1978 to put money in the market."

Some analsyts dismissed the slip under 300 as technically meaningless in the current bear situation, while others noted that the dip into the 700s may continue to fuel the pessimism which triggered the slide in the first place.

For some, the worst news of the week was the activation of the Dow Theory - the simultaneous decline of the Dow industrials and the Dow average of 20 transportation stocks, which both hit new lows for the year yesterday. Theory proponents see this a clear signal that the already entrenched downturn will continue.

More optimistic brokers feel that the market is nearly bottomed out and predict a technical, short term rally soon.

"We're very close to having a rally," Donner said. "But at what level on the Dow, I'm not sure.When you're down this far, what's another 10 points, another 20 points to fall."

Donner said a number of likely occurrences - a small decline in short term interest rates, the probable replacement of Arthur Burns as Federal Reserve hairman in January, or approval of a tax cut by the Carter administration - could trigger a turnaround, although it may be brief.

"Our firm was among the first to see a dire outlook for 1978," he said. "Now we not only find that we were in the hallpark, but we're almost on the pitcher's mound, so to speak, among the forecasters."

A report by Merrill Lynch Economics released yesterday says a recession is not in the picture for 1978, but a continued tight money policy by the Federal Reserve Board "could touch off a discouraging chain of events."

The report foresees disintermediation, or the shift of savings deposits to higher yielding instruments: a subsequent decline in housing activity and "then a dampening of business confidence that could lead to cutbacks in capital spending and produce the recession the Fed is trying to avoid."

Les Silverstone, manager of the Washington office of Dean Witter, said, "I think we've already slipped to a stabilizing level . . . the volume is not unusually heavy, which means a lot of the selling is over. We're drifting more than anything right now."

He said the market won't be shaken from its doldrums until there's a drop in interest rates or the Carter administration comes up with "something dramatic."

"Confidence won't be resorted until investors see a fundamental change in the economic news," he said.

A strong note of optimism was thrust into yesterday's cloudy news by Manufacturer Hanover Trust Co., which released a study portending:

"Rather than being on the verge of a new recession . . . we are experiencing what could very well turn out to be the longest expansion in postwar, peacetime history."

Standard & Porr's index of 400 industrials lost 0.64 to 100.33 on the day, with S&P's 500 stock composite index off 0.63 at 91.00.

Auto issues came under pressure, reflecting investors' dissastisfaction with the 17 per cent sales increase for the midOctober period reported yesterday.